Management and Control of the Corporation: The Basic Legal Framework

• Author: J. Anthony VanDuzer
• Profession: Faculty of Law University of Ottawa
• Pages: 254-301

254

Cha pter 7

MANAGEMENT AND

CONTROL OF THE

CORPORATION:

THE BASIC LEGAL

FR A M EWOR K

a. INtrODUCtION: SharehOLDerS,

DIreCtOrS, aND OFFICerS — the LegaL

SCheme OF COrpOrate gOVer NaNCe

In this chapter, we discuss how powers are allocated among sharehold-

ers, directors, and off‌icers and how their powers are exercised. The

CBCA1 and most other modern corporate statutes in Canada provide for

a clear division: shareholders elect directors who have the power and re-

sponsibility to manage or supervise the management of the corporation;

and directors appoint off‌icers and delegate to them some of their powers

and responsibilities relating to management. Shareholders’ control over

who t he directors are is intended to render the directors accountable

to shareholders. In many situations, however, th is division of powers

operates somewh at different ly from what the corporate st atutes appea r

to contemplate. In corporations with many shareholders, the powers

given to shareholders may not provide t hem w ith the pract ical ability

to ensure that man agement is accountable to them. As well, boards of

directors often do not play the pivota l role in managi ng the corporation

that would appear to be contemplated by the legislation. In many la rge

corporations, the off‌icers dominate decision making in a manner not

specif‌ically addre ssed in the legisl ation in any signif‌icant way.

1 Canada Busine ss Corporations Act, R.S.C. 1985, c. C-44 [CBCA].

Management and Cont rol of the Corporation: The Basic L egal Framework 255

In t his chapter we will f‌irst set out the basic allocation of powers

under Canad ian corporate statutes. The rem ainder of the chapter con-

sists of a more detailed and technical exposition of how directors and

shareholders exercise their power and the role played by off‌icers under

the CBCA. In the following chapters of the book, we build on this basic

foundation to develop a more complete picture of the determinants of

corporate governance. In Chapter 8, we describe the specif‌ic rules re-

lated to the approval of major corporate transactions. In Chapter 9, the

f‌iduciary duty, the duty of care, and other fundamental norm s for the

behav iour of dire ctors and of f‌icers are discu ssed. C hapter 10 deals wit h

shareholder remedies, which are one of the ways in which these norm s

are enforced. Chapter 11 provides an introduction to securities regula-

tion , which provide incre asingl y compre hensive rules for corp orate go v-

er nanc e tha t are of pa rtic ular sign if‌ic ance f or cor pora tion s who se sh ares

are widely held and traded i n public market s. In Chapter 12 , we present

some qualif‌ications as to how t he legal model of corporate governance

operates based on insights from corporate law t heory and practice and

discuss some of the other determinants of how corporations and their

directors and off‌ices behave. Chapter 13 is devoted to t he increasingly

important governance is sue of corporate social responsibility.

B. m aNagemeNt aND CONtrOL UNDer

the

CBCa

The t raditional breakdown of power to manage and control the cor-

poration is as follows:

      -

ment of, the business and the aff airs of the corporation;

 

directors, and serve at the pleasure of the board; and

  -

tion, but their only power is to vote for the election of directors and

to vote on proposals made to them.2

Under this breakdown, shareholders are essenti ally passive; they have

no power to initiate action related to the management of the corpora-

2 Automatic Self-Clea nsing Filter Syndicate v. Cunninghame, [1906] 2 Ch. 34 (C.A.)

(shareholders can not, by ordinary resolut ion, vary the mandate of t he directors;

amendment of the ar ticles is required); Kelly v. Electrical Const ruction Co. (1907),

16 O.L.R. 232 (H.C.J.) (shareholder s cannot initiate the cr eation of a by-law).

THE LAW OF PARTNERSHIPS AND COR PORATIONS256

tion, to control management directly, or to decide on any matter related

to the ordinary business of the corporation except a s specif‌ically pro-

vided in the articles or by-laws.

In general, the CBCA and the statutes modelled after it adopt this

breakdown (CBCA, ss. 102, 115, and 121)3 but enh ance the sha rehold-

ers’ passive role in s everal ways. Approval by sh areholders is required

before certain signif‌icant changes can occur to the corporation. The

CBCA also gives shareholders a limited scope for actively initiating cor-

porate action. To facilitate shareholder action, the CBCA gives share-

holders certain rights to access corporate information. Finally, the

CBCA improves the ability of shareholders to seek relief from the be-

haviour of management by providing a broad range of remedial options

to aggrieved shareholders.

The situations in which the CBCA specif‌ically requires sha reholder

approval include the following fundamental changes to the corpora-

tion:

 CBCA, s. 173);

 CBCA, s. 103);

   

a corporation other than in the ordinar y course of business” (CBCA,

s. 189(3));

 CBCA, s. 183); and

 CBCA, s. 211).4

As discussed in Ch apter 6, in some cases non-voting shares get voting

rights and particular classes of sh ares may have the right to vote sep-

arately as a class in connection with shareholder votes on these f unda-

mental changes.

The CBCA also provides for an active role for shareholders in two

ways.

 Propos als: shareholders can have matters put on the agenda for dis-

cussion at shareholders’ meeti ngs, including making, amending, or

repealing by-laws (CBCA, ss. 137 and 103(5)); and

3 For example, Onta rio Business Corporations Act, R. S.O. 1990, c. B-16 [OBCA];

Alberta Bu siness Corporations Act, R.S. A. 2000, c. B-9 [ABCA]; Saskatchewan

The Business Corporati ons Act, R.S.S. 1978, c. B-10 [SBCA]; Manitoba The Cor por-

ations Act, C.C.S.M . c. C225 [MCA]; the Northwe st Territor ies Business Corpora-

tions Act, S.N.W.T. 1996, c. 19 [NWTBCA]; the Yukon Business Corporation s Act,

R.S.Y. 1986, c. 15 [YBCA]; Newfoundl and & Labrador Corporations Act, R. S.N.L.

1990, c. C-36 [NLCA]; and New Br unswick Business Corporat ions Act, S.N.B.

1981, c. B-9.1 [NBBCA].

4 All these c orporate changes are di scussed in Chapter 8.